Carpe Diem

Chocolate Goes Global

The World Is Flat, and Chocolatiers Want to Coat It

NY Times: Swiss chocolatiers, having long ago conquered markets in Europe and North America, are now aiming at the vast expanses of Russia, India and China, making Swiss chocolate a case study in globalization.

Reminder: Trade works both ways. As economies like India, Russia, China, and Brazil become wealthy and prosperous by producing goods and services for the U.S. and European markets, the workers of those economies also become increasingly wealthy and prosperous consumers of American and European products.

Exhibit A: Swiss chocolate.

Carpe Diem

Finally, Some Relief for Double-Standard, Racist, and Insane Drug Sentencing for Baking Soda

WASHINGTONThe Supreme Court on Monday (December 10) said judges may impose shorter prison terms for crack cocaine crimes, enhancing judicial discretion to reduce the disparity between sentences for crack and cocaine powder.

WASHINGTON The U.S. Sentencing Commission voted unanimously Tuesday (December 11) to allow some 19,500 federal prison inmates, most of them black, to seek reductions in their crack cocaine sentences.

Four of every five crack defendants is black. Most powder cocaine convictions involve whites.

Even after the change, prison terms for crack cocaine still are two to five times longer on average than sentences for powder cocaine, the result of a 20-year-old decision by Congress to treat crack more harshly.


See previous CD posts
here and here. Note that crack cocaine is powdered cocaine + baking soda.

Carpe Diem

Gene Fama: Hardest Workin’ Man in Finance/Econ

From the Minneapolis Fed’s interview with University of Chicago economist Eugene Fama (pictured above):

Fama’s work transformed Wall Street, and later Main Street, by giving rise to a proliferation of low-cost index funds, as many questioned the value of paying for active portfolio management. “If one takes into account the higher initial loading charges of the mutual funds,” he observed over 40 years ago, “the random investment policy outperforms the funds.”

Mpls. Fed: How do you view the suggestion that some CEOs are overcompensated?

Fama: If it’s a market wage, it’s a market wage. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

Mpls. Fed: I understand that you work every day, even holidays. Is that right?

Fama: Right.

Mpls. Fed: That’s an amazing work ethic.

Fama: Not really.

(HT: Marginal Revolution)

Carpe Diem

Quote of the Day, Chart of the Day

“Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”

~Milton Friedman in his book “Monetary History of the United States 1867-1960,” (co-authored with Anna Schwartz)

Exhibit A: See chart above, click to enlarge. Monthly data for CPI and M1 are from the St. Louis Federal Reserve.
Carpe Diem

Market Signals Suggest Low Inflation, Stable Dollar

The top chart above (click to enlarge), shows the one-year percentage forward premiums and discounts for the USD vs. other currencies, based on current quotes for one-year forward exchange rates. The USD is now selling at a one-year forward premium vs. at least a dozen currencies, suggesting that the value of the USD has stabilized and might start appreciating in 2008.

The bottom chart above displays gold futures trading on the NYMEX, and shows moderate annual increases in the price of gold over the next 4 years of about 4%. Since gold is a hedge against inflation, the moderate increases in gold prices through 2011 indicate that there are no inflationary pressures building in the U.S. economy.

Bottom Line: These direct market signals suggest that: a) the fall of the USD is probably over and we can expect an appreciation of the USD vs. the pound, rupee, peso, etc., and b) the current rise in inflation (4.29% increase through November 2007) is probably temporary, and we can expect lower inflation in 2008 and beyond. See related previous post here.
Carpe Diem

Put Your Tax Money Where Your Political Mouth Is

Challenge: If taxes increases for “the rich” are a good thing, members of Congress and presidential candidates (all part of either “the rich” or “super-rich”) don’t have wait for the Bush tax cuts to expire or for Congress to pass new tax legislation, they can immediately raise taxes on themselves voluntarily by making a gift to the U.S. Treasury.

Here is the link to the Treasury’s website with instructions for politicians, presidential candidates, or any citizen like Warren Buffet who wish to make a general donation to the U.S. government into an official account called “Gifts to the United States.”

Question: What if Edwards or Clinton proposed legislation to force everybody to “donate” 5 pints of blood every year. Wouldn’t it be a lot more credible if they were already donating blood themselves right now voluntarily, and not waiting until they were forced to “donate” blood by their own legislation?

This is from a previous CD post, and I mentioned on Larry Kudlow’s radio program today that I would re-post instructions on how politicians and Warren Buffet can pay extra taxes to the U.S. Treasury.

Carpe Diem

Why Inflation Will NOT Be A Problem

Inflation vs. M1 Growth with a 3-year Lag
The top chart above (click to enlarge) shows the relationship between M1 Money Supply and the effective Fed Funds rate from 1999-2007. Notice that there was a 25% increase in M1 that was required to get the Fed Funds rate to fall from 6.5% in 2000 to 1%. The bottom chart shows that M1 grew between 3.5% and 6.5% in each year from 2001-2004.

The bottom chart allows for a 3-year lag between growth in the money supply and its eventual full effect on the price level and inflation (average annual inflation), and therefore matches M1 growth in 1998 with consumer inflation in 2001, etc.

November 2006-November 2007 inflation was 4.29%, and inflation averaged 2.72% for the year to date, reflecting the strong money growth in 2004 of 5.58% (allowing for a 3-year lag). The good news on the inflation front is that inflation in 2008 will reflect money growth in 2005 (assuming a 3-year lag), which was less than half (2.05%) of money growth in 2004 (5.58%).

Bottom Line: Inflation will not be a problem in the future, and will likely fall in 2008 and 2009 from its level in 2007. The money supply has been flat now for 3 years, suggesting that inflation in the future will be low and stable. The money supply (M1) has actually FALLEN over the last year.

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Consumer Spending or Business Investment?

Tune in to CNBC’sKudlow and Company” on Monday night (7 p.m. EST) for an economic smackdown between Robert Reich, former labor secretary under Clinton, and free-market Austrian economist Mark Skousen, on the question, “What drives the economy–consumer spending or business investment?” It should be an interesting debate between a demand-side Keynesian and a supply-side Austrian.

The graph above shows that retail sales is not a leading indicator of the economy, does not predict recessions (shaded areas) and is probably one of the most stable and boring economic variables. Notice in the graph above that retail sales almost never decline, even during recessions (shaded areas). Industrial production, on the other hand, is an excellent indicator of the business cycle. Notice the significant decline in industrial output in each of the last four recessions.

Conclusion: According to Skousen, “Productivity and investment are driving forces in the economy; consumer spending is the effect, not the cause, of prosperity. Say’s law (supply creates demand) trumps Keynes’s law (demand creates supply)!”

For more information check out Mark Skousen’s book “The Structure of Production.”